In October 2021 the U.S. Department of Justice (DOJ) announced the launch of a new redlining enforcement initiative.  Since that time, government agencies such as the Consumer Financial Protection Bureau (CFPB), the DOJ, the Federal Housing Finance Agency (FHFA), and the Federal Trade Commission (FTC) have all ramped up enforcement and supervisory activities focused on this issue. This is because, almost 30 years after the landmark settlement reached in the case of United States of America v. Chevy Chase Federal Savings Bank and B.F. Saul Mortgage Company, many mortgage lending institutions still seem to be struggling to demonstrate adequate efforts to market and/or to deliver services to high minority and/or low income areas. 

In the mortgage industry, redlining is defined as denying or refusing to offer lending services based on the demographics of the applicants’ neighborhood rather than their financial qualifications - a practice which directly conflicts with anti-discriminatory directives since it perpetuates economic gaps and creates disparate effects that endure for generations. The current focus by regulatory and enforcement agencies on conducting fair lending reviews makes redlining analysis a high priority matter for all lending institutions. 

One case filed on July 15, 2020, that has received a great deal of attention is that of CFPB v. Townstone Financial, wherein the CFPB alleged marketing discrimination was taking place in the Chicago Metropolitan Statistical Area (MSA), where the institution conducted its operations. In February 2023, the original CFPB suit was dismissed by the U.S. District Court for the Northern District of Illinois. The case is now back in the headlines after the CFPB filed an appeal earlier this month.   

In the district court case, the CFPB asserted Townstone discouraged potential Black applicants and applicants in majority- (50% or more) and high- (>80%) Black census tracts, known as MBCTs and HBCTs, an Equal Credit Opportunity Act (“ECOA”) violation, by 1) company leadership making disparaging statements on a conservative radio station, 2) having no marketing program aimed at attracting Black consumers, and 3) not employing any Black Loan Officers.

The CFPB’s initial case, and now appeal, are largely rooted in disparate impact theory. A statistically significant disparity existed between the percentage of Black and minority applications and originations from Townstone in comparison to its peers.  The CFPB pointed to the Chicago MSA having 13.8% HBCTs, but, during the period 2014 - 2017, Townstone received less than 1% of applications from the same HBCTs – and more than half of those were from non-Hispanic white applicants. Similarly, the Chicago MSA has 18.7% MBCTs, but Townstone received only between 1.3% and 2.3% of applications from MBCTs during this same time period.  More concerning, Townstone’s peers were able to draw many times more applicants from these areas, between 7.6% and 8.2%, over the same period.

Townstone countered that ECOA does not speak to “prospective applicants”, hence ECOA should not apply. In February 2023, the district court  agreed with the defendant, Townstone Financial, and its owner, Barry Sturner, and dismissed the lawsuit.

The CFPB filed an appeal on April 4, 2023, which will now be taken up by the U.S. Court of Appeals for the Seventh Circuit. This case clearly establishes the need for institutions to assess their own lending programs. Institutions should constantly monitor and evaluate the programmatic components of an existing Compliance Management System (CMS) by assessing the following: 

1. Perform a Redlining Risk Analysis with the following analytics.
   • Understand Your Market - Determine the areas in which you are lending and from where you are pulling applications.  Determine areas that are Low-to-Moderate Income (LMI), Majority-Minority Census Tracts (MMCT), MBCT, HBCT, Majority Hispanic Census Tracts (MHCT), High Hispanic Census Tracts (HHCT) and which are not. Familiarize yourself with how this data looks on a map, overlaid with your Assessment Areas (“AAs”) and/or Reasonably Expected Market Areas (“REMAs”).
   • Understand Market Penetration and Analytics - Analyze the application volume and origination volume coming from these areas and further what percentage is from protected class populations. Determine which tracts, if any, you are not penetrating. Ensure your loan volume is distributed equitably to those protected areas versus those non-protected areas.  
   • Peer Assessments - Define a methodology and determine who your peers are, including if you should have individual peer groups for each AA or REMA. Analyze your application and origination volumes and penetration rates compared to your peers. Determine which areas show statistically significant disparity between your penetration and that of the peers.
   • Market / Aggregate Assessment - Analyze your application and origination volumes and penetration rates compared to the market.

2. Assess and modify Policies and Procedures.  Give your Policies and Procedures a good read and evaluate if there are any potential redlining or fair lending risks within them.  Create a regular schedule to ensure a review occurs on a periodic basis if this is not already in place. Verify Policies and Procedures have a governance process with appropriate approval mechanisms built in for effective challenge of internal and market-facing activities. 
3. Review and update training.  Evaluate, or create if new, a periodic schedule for reviewing training materials, accounting for regulatory changes, and making sure the appropriate are represented to evaluate the audience for each course. Monitor completion rates, recognizing and reporting non-compliance to the appropriate channels for those who do not complete assigned training. Don’t forget that your Board needs training, too. Financial institutions should create customized and meaningful training for participants.  
4. Examine complaints.  Be aware of allegations of discriminatory treatment from consumers, vendors, employees and other third parties. Examine and look for ways to enhance Complaint Policies and Procedures to ensure better intake, identity, remediation and closure of the feedback loop process.  This may require the assistance of partners outside the first line to be involved.  Ensure that third party complaints, where consumer contact occurs, are effectively captured and reviewed as well. Such processes are expected and required. 

A heightened sense of awareness combined with proper monitoring will enable mortgage lenders to identify and address potential redlining concerns proactively. Increasingly, the adoption of programmatic elements to examine an institution’s marketing efforts and actual performance relative to protected groups is recommended.  

If your institution needs assistance in conducting redlining or fair lending risk reviews, RiskExec has a team of former bankers, regulators, fair banking officers, and CRA officers that can help, as well as RiskExec® software from Asurity™, the leading solution for fair lending compliance and analysis. Find out more about our solutions at Asurity.com/RiskExec or contact me at mhammer@asurity.com.

Melissa Hammer is Senior Vice President of Fair Lending Product Management for RiskExec, Inc. and brings over 20 years of broad financial industry risk and compliance expertise to the company. Before joining RiskExec, she served as the Vice President and Senior Group Manager of Compliance, U.S. Conduct Risk and Ethics for a Top 10 Bank, led Fair Lending Program implementations for over 50 financial institutions across the U.S. as part of a consultancy, and held a series of progressive roles at a large regional institution.

Throughout her career, Melissa has focused her efforts on managing enterprise risk and ensuring regulatory compliance, including CRA, fair lending, and UDAAP. Melissa is highly credentialed, having earned the Certified Regulatory Compliance Manager (CRCM), Certified Enterprise Risk Professional (CERP), and Certified Compliance and Ethics Professional (CCEP) designations, with broad public speaking and publication experience. Prior to joining the Asurity organization, she earned her BBA in Finance from Columbus State University, and her MBA from Auburn University.